Spain finds itself uncomfortably exposed at the centre of a renewed euro crisis

THEY are licking their wounds in Madrid. With Spain now at the centre of the euro crisis, Nicolas Sarkozy holds it up as an example French voters must avoid. A leading think-tanker is widely quoted saying that Spain is good for flamenco, red wine and nothing else. Even Argentina has joined in, ignoring threats of reprisals to nationalise a Spanish-owned oil company, YPF (see article). As Spain's ten-year bond yields crept over 6% this week, talk of a bail-out for the euro zone's fourth economy is getting louder.

The deluge of criticism has caught Mariano Rajoy's government by surprise. Some officials admit to a slip-up over this year's budget target, which Mr Rajoy wanted to be 5.8% of GDP whereas Brussels insisted on 5.3%. But the government does not believe this justifies all the Spain-bashing. Reforms to banks, the labour market and the budget have all been rushed through in Mr Rajoy's first four months in power. An austerity budget aims at a huge €27 billion cut in the deficit. Regional governments have been told to find €16 billion more: education cuts are to be announced this weekend, health cuts soon afterwards. And the government is threatening to take direct control of some regions' finances.

“Some people do not seem to realise there has been a change of government,” complains one official, blaming Spain's tarnished reputation on José Luis Rodríguez Zapatero, whose Socialist government was ousted last November. “Our political stability is now the envy of Europe.” Other countries, he implies, would love to have four years with an absolute parliamentary majority ahead of them.

Spanish banks have drawn heavily on the European Central Bank's cheap credit this year. That has helped Spain to raise almost half this year's €86 billion of financing, though the cost has risen. But is this enough? There is growing talk of the European Financial Stability Facility (EFSF) being used to rescue banks loaded with toxic real-estate assets. Cinzia Alcidi and Daniel Gros of the Centre for European Policy Studies see a massive €380 billion property and construction overhang, equivalent to 35% of GDP. Many see a looming bail-out from the ECB, the EU and the IMF. “Spain is likely to be pushed into a troika programme of some kind during 2012,” conclude Ebrahim Rahbari and Guillaume Menuet of Citigroup in a recent report.

Unemployment is 24% and climbing. The budget deficit barely shrank last year, falling from 9.3% to 8.5%, because of overspending regional governments. The target was 6%. And growth is an even bigger concern. This year's adjustment may cut GDP by more than 2%. The IMF has improved its 2012 growth forecasts for most economies, but not for Spain, where GDP is expected to shrink by 1.8% (see chart). And there will be little growth next year. More deficit-cutting will be needed, and the €2.5 billion being raised from a tax amnesty this year will have to be made up for in 2013.

There are serious doubts, too, about the deficit's future path. Citigroup predicts a 6.6% deficit next year, well above the target. The Bank of Spain's governor, Miguel Angel Fernández Ordóñez, has warned that taxes will have to go up if revenues do not match the forecasts by Cristóbal Montoro, the budget minister.

The budget sees social-security contributions rising and unemployment benefits falling, despite growing unemployment. Mr Montoro left sales tax untouched, let pensions rise and kept civil-service pay static to limit damage to consumer spending. But he may still be forced into a sales-tax increase. And doubts abound about regional governments. Juan Rubio-Ramírez of Duke University doubts if Mr Rajoy has the political will to take on the regions when their budgets are approved in May. Senior officials insist the first intervention by Madrid will come then. That would send a signal that Mr Rajoy means business.